The Importance of Personal Finances
At its core, money is a record of favors owed. I give you a cabbage from my garden. You give me a dollar in exchange. The dollar is an “I owe you” note. Next month, I can hand you that same dollar and ask for a watermelon in return.
When you work for money, you’re doing favors for other people. They give you money in return for the favors. You can then use your money to ask favors of other people. Those favors can be anything that has value: food, services, electricity, entertainment, etc.
To make money, help others. Help as many people as you can, as much as you can. That is the path to wealth.
Your goal when you work is to build enough wealth so that when misfortune strikes, you can use your money to ask favors of others. Beyond a certain amount, money ceases to improve your lifestyle. Sure, you can always pay for more lavish goods and entertainment, but it doesn’t really improve your life. And enjoyment is relative. Once you get used to a lavish lifestyle, you cease to enjoy the simpler things in life.
The Millionaire Next Door by Thomas J. Stanley and William D. Danko distinguishes between prodigious accumulators of wealth (PAW) and under accumulators of wealth (UAW). If you want to become a millionaire, you need to be a PAW. That means making lots of money while spending significantly less than you earn. It’s the ratio between the two that matters. If you make $50,000 a year, but only spend $20,000 of it, then you are a PAW. If you make $500,000 a year but spend it all, then you are still a UAW.
Be a PAW. Eventually, you will become a millionaire.
Personal Finances Action #1: Get a pen and paper. Write down how much income you make each year. Then figure out about how much you spend each year. Are you a PAW or a UAW?
Tracking Your Cashflows
As Peter Drucker once said, “what gets measured, gets managed.” He also said, “if you can’t measure it, you can’t improve it.” Both of these quotes were said in the context of business, but also apply to your personal finances. After all, your personal finances are the business of you. If you track your finances, they get managed. If you can measure your finances, you can improve them.
Personal Finances Action #2: You don’t need fancy software to track your finances. Just create a new spreadsheet in your favorite spreadsheet app. If you don’t have a spreadsheet app, use Google Sheets (sheets.google.com) because it’s free. You can get sophisticated with your tracking, but for now, just use two columns. On the left column, write down the name of each expense you have. On the right column, write the amount of money you spent on it. Track every single penny you spend for at least a month. At the end of the month, review your expenses. Most people doing this are shocked to see all the little things they mindlessly spend money on. You will probably spot a bunch of items that are unnecessary. Tracking every penny you spend will make you aware of where your money is going. And being aware will allow you to manage and improve your finances.
Look at money not as numbers, but as streams. You have a stream of money coming in (your income), and a stream going out (your spending). Your streams are your cashflows. To improve your finances, you will want to make your income stream as large as possible, while making your spending stream as small as possible. You will also want to increase the number of income streams you have, so you’re safe if one stream dries up (like if you’re laid off from your job). Similarly, you should decrease the number of spending streams by canceling your unused services and stopping unnecessary purchases.
Personal Finances Action #3: Take 15 minutes and brainstorm ways you can increase the amount of money you make in a year.
Personal Finances Action #4: Take 15 minutes and brainstorm ways you can reduce spending each year.
Be on the Lookout for Opportunities
Opportunities are everywhere. The smarter you are and the more you know, the more opportunities you will see.
Learn as much as you can about the world around you. You can do it by reading or by going out and doing things. Or you can do both. Learning puts the seeds of ideas into your mind. Those seeds will make you aware of opportunities when you see them.
You’ve already missed out on millions of opportunities. But they will keep coming. If you miss one, just learn some more and be on the lookout for the next one. There will always be a new opportunity for smart people like you to notice. Only those who have stopped learning ever feel trapped with nowhere to go.
You might have heard about the Law of Attraction. You probably dismissed it as pseudoscience and woo-woo. And you were right. It is a pseudoscience, and it is also a whole lot of woo-woo if you take it at face value. I mean, how can daydreaming about your bank account filling up with a million dollars make it happen? Yes, that part of the Law of Attraction is fantasy and a lazy distortion of the original concept. Here is how the Law of Attraction really works: when all you think about all day every day is making a million dollars, you will notice every opportunity around you for making a million dollars. Take advantage of the Law of Attraction by spending all of your time learning about, daydreaming about, and taking action on achieving your goals. You will notice that opportunities are everywhere.
Personal Finances Action #5: Write down the thing you want most in the whole world. How much do you want it? How much time you spend on something should be proportional to how much you want it. Start spending more time on the thing you want most to make the Law of Attraction work for you.
Warren Buffett, possibly the greatest stock market investor who ever lived, once outlined his rules of investing:
- Rule #1: Never lose money.
- Rule #2: Never forget rule #1.
Buffett’s investing rules might be oversimplified, but they describe the core of investing in three words. Never lose money. Notice that it doesn’t mention making money. Investing is not about wealth generation. It’s about wealth preservation. As I described earlier, you make money by helping as many people as you can, as much as you can. Once you get your money, you hold onto it by investing it.
If you live in the United States, your cash devalues by 2-4% every year. That is called inflation. 2-4% might not sound like much, but consider the long-term effects of inflation.
Suppose you know nothing about investing. You just became a proud parent, and you want to save money for your child to go to college. You look up the tuition and see that it costs $10,000 a year. So you do what any parent with no knowledge of investing might do. You put $10,000 in cash into a big trunk and bury it in your backyard in the dead of night.
Fast-forward eighteen years later. Your daughter just graduated from high school and was accepted to college. You dig the nest egg up from your backyard. The $10,000 in cash is still there. You bring it to the college bursar’s office where you make a heart-sinking discovery. Tuition had gone up over the past 18 years. It now costs $18,000 a year. Inflation caused the prices of everything to increase, and the value of your cash to decrease.
How do you avoid the ravages of inflation? By investing your money. If the parent who did not know about investing had put the $10,000 into the stock market, that money would probably be worth over $55,000 after 18 years. That’s because the average annual return from the S&P 500 stock market index is about 10% a year.
When you invest your money, as long as you make money faster than inflation devalues it, you will never violate Rule #1. Don’t forget that.
Personal Finances Action #6: Learn everything you can about investing and invest your savings.
Running Your Own Business
By definition, businesses sell products and make profits. That’s all you need to have a successful business. At least one product. A profit. That’s it. Let’s look deeper into those two crucial components of a successful business.
A product is something that someone else wants. If somebody wants it, it’s a product. If nobody wants anything your business produces, your business will fail because you don’t have a product. How do you know if people want something you create? By testing the market. Preferably, you test the market before you spend your time and resources creating something. Test the market by asking potential customers if they would buy the product if it existed. Create a prototype and show it to people. Gauge their interest. Are they willing to give you a down payment so that they will be the first to have the product when it’s ready? Listen to the people who put their money where their mouth is.
Personal Finances Action #7: Think about different products that you can sell to others. Do you know how to make something that other people enjoy? You could sell it. Are people always asking you for help because you have a specific skill? You could provide it as a service.
Once you have a product, you’re halfway toward having a successful business. Now you need a profit. Profit is what you have left over when you take all the money you made from customers and subtract all of your expenses from making the product available. If you’re not making a profit, you need to either charge more money for your product or decrease the costs of producing the product. Or you could do both. Make it easier on yourself and make sure you’re profitable from the start. Set your prices high. It’s easy to lower your prices later, but difficult to raise them without hard feelings from your customers. Don’t spend money you don’t have to make your product. In the beginning, create a minimum viable product as cheaply as possible. You can always add features later. You can always upgrade your equipment later. Reinvest all your profits, but not more, back into your business.
Personal Finances Action #8: Create a minimum viable product (MVP) and try selling it. An MVP is a product with the minimal set of features. But don’t forget the “V” in “MVP.” Your minimal product must still be viable. The one feature it has must be worth paying for. Try selling it. If people like it and it’s profitable, you can add features and scale up production. At that point, you have a business.
Personal Finances Action #9: Automate your finances. Set up automatic deposits for all your income and automatic payments for all your bills. It makes for less worry and less chance you’ll forget to pay your bills on time.
Personal Finances Action #10: Reduce dependence on others. If you can do things yourself, do them yourself. At least until you get on solid financial ground, you should do as much as you can yourself. Stop paying people to cook your food, trim your bushes, and clean your home. Do those chores whenever you have free time. It won’t be easy or enjoyable, but you’ll thank yourself later when you’re financially independent.
Personal Finances Action #11: Simplify your accounting. Cut back to the bare minimum in services and credit cards. It’s much easier to keep track of one or two credit cards than seven.
Personal Finances Action #12: Transfer your debt. If you’re struggling with credit card debt, find a credit card that will give you a 0% interest introductory offer. Do a balance transfer to move your debt from your highest interest credit cards to the new 0% interest credit card. That should buy you some time to pay down your debts without racking up vast amounts of interest.
Personal Finances Action #13: Use only cash. Credit cards don’t feel like real money. But if you carry bills and coins around to pay for everything, you keep a better sense of what you are spending when you buy things.
Personal Finances Action #14: Go minimalist. You don’t have to do anything extreme. Just resolve to get rid of two old things for every new thing you buy. Eventually, this habit will get you down to your bare minimum. Another rule of thumb to keep in mind: if you haven’t used something in over a year, you probably don’t need it.
Personal finance is a mental game. Therefore, the supplements that will help you most are nootropics, or smart drugs. Here are some of the more popular ones. Keep in mind that I am not a doctor and this list is for informational purposes only. Not all of these drugs are legal everywhere, and some require a doctor’s prescription and supervision. Do your own research and consult with a medical professional before trying any of these.
Personal Finances Action #15: Try piracetam. Manufactured in the 1960’s, Piracetam is the original nootropic drug. It has been researched and used for over 50 years and is considered safe and non-addictive. Piracetam has been found to improve memory, verbal learning, and focus. It has a low incidence of mild side effects including headache and gastrointestinal upset. It is also relatively cheap compared to other smart drugs.
Personal Finances Action #16: Try Noopept. Noopept is over 500 times more potent than Piracetam. Like piracetam, it is capable of enhancing memory, learning, and focus. Noopept is also a powerful antioxidant that prevents neurological disorders and helps the brain grow. Because of this, it is thought to improve long-term memory.
Personal Finances Action #17: Take Modafinil. Modafinil is a prescription drug that is known to increase focus and problem-solving abilities. Users report that it promotes motivation and concentration, resulting in higher productivity. It is not addictive, but regular users can develop a tolerance for it. Modafinil is also expensive. It costs $500-$900 for a 30-day supply.
Personal Finances Action #18: Try adrafinil. For all the effects of modafinil without a prescription, there’s adrafinil. Adrafinil is a precursor to modafinil. When you take adrafinil, your liver converts it to modafinil after about an hour. The main drawback is that it taxes your liver and can cause an elevation in liver enzymes.
Personal Finances Action #19: Take aniracetam. Aniracetam is the only member of the racetam family of drugs that also has a stress-lowering effect. It is known to boost memory, cognitive ability, and confidence levels. Many people use it before stressful events such as public speaking or tests. It is often used with choline to prevent the primary side effect of headaches.
Personal Finances Action #20: Track your finances with Mint (www.mint.com). Mint is a free website that helps you track and manage your finances. It is owned by Intuit, the makers of TurboTax and QuickBooks.
Personal Finances Action #21: Manage finances and business operations with Airtable (www.airtable.com). It is online software that is a cross between a spreadsheet app and a database. You can easily add photos, contact information, priority levels, and checkboxes to indicate completion. Real-time collaboration features allow you to comment on files and share information with your team.
Personal Finances Action #22: use ProductHunt (www.producthunt.com) to find trendy new products before the rest of the world finds out about them. ProductHunt introduces the best new products daily. Products they recommend include apps, websites, books, and technology.
Personal Finances Action #23: Browse AngelList (www.angel.co). It is an interface between startup companies and the rest of the world. You can post jobs for your own startup, find startup jobs, or invest in startup companies.
Personal Finances Action #24: Invest with TD Ameritrade (www.tdameritrade.com). It is an online brokerage that allows you to buy and sell stocks online.
Personal Finances Action #25: Learn about investing using Yahoo! Finance (finance.yahoo.com). It offers financial news, a stock portfolio manager, and stock screeners to help you research your next stock purchases.
Personal Finances Action #26: Use Freshbooks (www.freshbooks.com). Freshbooks has small business accounting software that makes it easy for you to send invoices, organize expenses, and track payments.
Personal Finances Action #27: Use PayPal (www.paypal.com) to facilitate online money transfers. With PayPal, you can send or receive money using email addresses or mobile phone numbers.
Personal Finances Action #28: Use Kickstarter (www.kickstarter.com) to gauge interest and fund your product idea before you spend too much time or money producing it.
Personal Finances Action #29: Read books on personal finances:
- Rich Dad Poor Dad: What the Rich Teach Their Kids About Money That the Poor and Middle Class Do Not!, by Robert T. Kiyosaki
- The Total Money Makeover: A Proven Plan for Financial Fitness, by Dave Ramsey
- The Richest Man in Babylon, by George S. Clason
- MONEY Master the Game: 7 Simple Steps to Financial Freedom, by Tony Robbins
- The Intelligent Investor: The Definitive Book on Value Investing, by Benjamin Graham
- The Millionaire Fastlane: Crack the Code to Wealth and Live Rich for a Lifetime, by MJ DeMarco
- Secrets of the Millionaire Mind: Mastering the Inner Game of Wealth, by T. Harv Eker
- The $100 Startup: Reinvent the Way You Make a Living, Do What You Love, and Create a New Future, by Chris Guillebeau
- I Will Teach You To Be Rich, by Ramit Sethi
- The Essays of Warren Buffett: Lessons for Corporate America, by Warren E. Buffett
Personal Finances Action #30: Explore personal finance websites and blogs:
- Mr. Money Mustache (www.mrmoneymustache.com) is about living a frugal, yet “Badass” life of leisure.
- The Motley Fool (www.fool.com) has free articles and podcasts for individual investors. Their flagship products are their premium stock market investing newsletters.
- Seeking Alpha (www.seekingalpha.com) is an investing website featuring curated articles from thousands of contributors.
- Financial Samurai (www.financialsamurai.com) delves deep into investing, real estate, retirement planning, career strategies, money philosophy, and more to help you achieve financial independence sooner, rather than later.
- WiseBread (www.wisebread.com) is a community of bloggers writing to help you live large on a small budget.
- Get Rich Slowly (www.getrichslowly.org) covers a range of topics related to attaining greater financial freedom.
Personal Finances Action #31: Listen to podcasts on personal finances:
- You Need A Budget (YNAB), with Jesse Mecham, is a weekly podcast about getting out of debt, saving more money, and beating the paycheck-to-paycheck cycle.
- Listen Money Matters, with Andrew Fiebert and Thomas Frank, offers actionable personal finance advice with a dose of brash humor.
- The Dave Ramsey Show, with Dave Ramsey, teaches you how to manage and budget your money, get out of debt, build wealth, and live in financial peace.
- The Financial Mentor Podcast, with Todd R. Tresidder, reveals unconventional wealth building advice and advanced investment strategy tips.
- Wall Street Unplugged, with Frank Curzio, offers financial news and interviews with leading economists and investment professionals.